The Attractive Combination That Could Earn Etn. Fr. Colruyt NV (EBR:COLR) A Place In Your Dividend Portfolio

Dividend paying stocks like Etn. Fr. Colruyt NV (EBR:COLR) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

While Etn. Fr. Colruyt's 2.7% dividend yield is not the highest, we think its lengthy payment history is quite interesting. The company also bought back stock equivalent to around 1.4% of market capitalisation this year. There are a few simple ways to reduce the risks of buying Etn. Fr. Colruyt for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Etn. Fr. Colruyt!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 38% of Etn. Fr. Colruyt's profits were paid out as dividends in the last 12 months. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Etn. Fr. Colruyt paid out 53% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's positive to see that Etn. Fr. Colruyt's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

While the above analysis focuses on dividends relative to a company's earnings, we do note Etn. Fr. Colruyt's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Etn. Fr. Colruyt's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Etn. Fr. Colruyt's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was €0.9 in 2011, compared to €1.4 last year. Dividends per share have grown at approximately 4.2% per year over this time.

While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is unappealing.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Earnings have grown at around 9.4% a year for the past five years, which is better than seeing them shrink! Earnings per share have been growing at a credible rate. What's more, the payout ratio is reasonable and provides some protection to the dividend, or even the potential to increase it.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Etn. Fr. Colruyt's dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. Etn. Fr. Colruyt performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Etn. Fr. Colruyt that investors need to be conscious of moving forward.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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